The Great Variety of Poor Rich People:Magambo Guru

By: Richard Daughty, The Mogambo Guru - The Daily Reckoning

-- Posted Thursday, 14 August 2008 | Source: GoldSeek.com

If you'd like a sample of the kind of "hedonic" qualifying idiocy running rampant in economics these days, The Economist magazine reviewed a paper by Christian Broda and John Romalis at the University of Chicago. These two guys say that the inequality between the rich and the poor is not as bad as it looks. This was such a surprising development that I and all my pals rooting around in the dumpsters behind the grocery store stopped to listen! We are not poor!

First off, we bums found out that we are not as bad off as we think we are because "around two-thirds of the increase in the standard inequality gauge is offset by the poor's lower inflation rate", which we get by consuming mostly non-durable imported items like food, clothing, and footwear that were falling in price!

The rich, who consume more services, comparatively suffer because they mostly consume domestic services, which are NOT imported, and so have prices that are going up with the inflation in the money supply!

I suddenly felt so bad for the rich that Lefty and I made a promise that the next time we come across an apple that isn't too mushy, we will give it to a rich guy as our way of helping them out!

And if that was not enough, these university egghead guys actually go on to say that the poor are actually thriving, as "the range of goods consumed by poor households increased by far more than for rich households. The benefit of this extra variety is not captured in income or inflation, but it can be quantified."

At this promise of quantification of the benefits of diversity of available imported goods as impacts inflation, I said, "Shut up you guys! This is going to be good!" As I stretched out on a pile of rotting cabbage in preparation for this exciting bit of news, I was actually all tingly at the thought of seeing how the inequality between the rich and the poor can be shown to be offset by sheer variety of goods in the marketplace!

It wasn't long in coming, and sure enough, before I could even get comfortable, the very next sentence was "If that gain is expressed as an addition to real income, the remaining increase in inequality vanishes."

Hahahaha! This is too much! The poor are as rich as the rich!

And lest you think that I am exaggerating the effects of inflation because that is just the kind of Hysterical Reactionary Loudmouth (HRL) I really am, this is one time I am not, as inflation in imported prices is still inflation in imported prices, and for those who are encouraged by the recent reports of seemingly positive GDP growth of 1.9%, Randall Forsyth in his Current Yield column in Barron's reminds us that GDP accounting means that "Soaring prices of imports, including petroleum, lowers the GDP deflator" because "imports count as a negative." Hahaha!
Inflation went down because imports went up in price!

In effect, he says, the government is applying "truly Orwellian logic: higher import prices mean lower inflation and therefore higher growth"! Hahaha!

This is so bizarre that even he can barely control his laughter, and says, "You can't make this stuff up."

Perhaps this is why I am so miserable these days, sitting here in the Mogambo Powerful Bunker Of Doom (MPBOD), uselessly looking at my desk covered in charts, reams of erstwhile useful analysis and miscellaneous "past due" notices from various creditors, knowing that it is all crap.

Even Chris Powell, of the Gold Anti-Trust Action Committee, agrees with me and says, in a pithy phrase that should congeal your blood at the tragic implications,

"There are no markets anymore only interventions."

Ed Steer of Casey Research tells me that we are not alone, and presents a commentary by Peter Degraaf and posted at Bill Murphy's lemetropolecafe.com, who "doesn't mind admitting that (technical analysis) is pretty useless in the face of this kind of intervention."

What kind of intervention? How about foreign central banks suddenly plowing a staggering $28 billion into buying U.S. debt last week, and stuffing the enormous haul of government and agency debt into their accounts at the Fed itself, taking their total ownership of government and agency debt to $2.4 trillion! At a lousy 5% interest, this is $120 billion in cash that we are shipping out of the country per year to these guys, just in interest payments!

And why are these foreigners doing this? James Turk at goldmoney.com explains "When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly."

This would, then, explain why the dollar shot up last week, out of nowhere, for no reason that I can think of other than that all the alternative currencies suck even worse! Hahaha! What a world!

Aside from the stock and bond markets, Mr. Degraaf says that even "Gold closed just above the $850 support line during a washout caused by the performance of a US dollar that defies belief. Without any improvement in fundamentals, the dollar rose 132 points today. The largest gain in
years! Despite a banking crisis, low interest rates, huge deficits, money supply running in double digits, housing sector in shambles, the US dollar has now risen 8 out of the last 9 days. Someone please convince me that this is not rigged. Meanwhile at $855.00 the gold price is back at $323.00 expressed in 1980 dollars!"

And it is not just gold acting weird and grossly under-priced, but silver, too, as Mr. Steer notes that

"Ted Butler also mentioned yesterday that silverby any measurementis the most oversold it's ever been in its history."

In history!

My mind screams, "It's the time to buy!" And I would, too, but I went to the kids' piggy banks this morning and there is nothing in them except useless scraps of paper that say "IOU $5. Love, Dad."

They are not going to be happy when I explain to them that we are both victims, as I have no money either, just like them, and similarly because the Social Security Trust Fund is holding my "money" in the form of IOUs, whereas at least I said "love" at the end, which is a hell of a
lot more than the spendthrift, bankrupting government ever did for me! The bastards!

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Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.

Visit The Daily Reckoning's website.

On royalty, "democracy" and the markets by Bill Bonner

No, I see his point, but I don't concur on ROYALTY. Colonialism and GlobalISM is their wont! But the essay has its merits .. and the links are Great, would taken me HOURS to do.

Poor Freddie. The federally-chartered lender announced a loss of nearly $5 billion. You’d think it had lit up a cigarette in a sushi joint. Suddenly, everyone was jumping all over it. Investors spanked the company...the shares fell 30% after the firm announced a cut of as much as 50% in the dividend. Sister Fannie didn’t get away either. Her shares went down 22%.

Meanwhile, the U.S. dollar went down again – hitting another record low against the euro. Years ago, we guessed it would drop to $1.50 per euro. Today, it is at $1.48. Yesterday, a rumor made the rounds...that the Fed was getting ready for an emergency cut. “The Fed will keep its options open,” said Neil Mellor of the Bank of New York Mellon. But an emergency cut seems unlikely. Instead, the futures market is giving a 90% probability of another cut at the Fed’s regular meeting on December 11th.

And what happened to that correction? Gold added $15 yesterday. We were hoping for more of a downturn. We don’t like to buy when the price needs to correct.

Oil, too, headed up – it’s at $96 a barrel, a new record high. Here comes the explanation: the winter is going to be cold.

But back to Freddie, Fannie et al. What had they done wrong?

Nothing, according to Richard Styron, Freddie’s CEO.

“We aren’t happy about this,” he told a conference call. Then, he went on to describe what it was he wasn’t happy about. As the Financial Times put it:

“Mr. Styron blamed the meltdown in the U.S. mortgage market and the attendant decline in the value of mortgage-related shares.”

Who could have seen that coming, he seemed to ask?

It is always a source of great amazement and entertainment to us here at the dour headquarters of The Daily Reckoning on the banks of the River Thames (in the building with the golden balls) – how the smartest and best informed investors can walk into the most obvious traps.

Freddie buys mortgages. It has an instruction to do so from the United States Congress – based on the ostensible grounds that a little more money in the mortgage market might be good for homeowners...and the hidden motivation that it might help get some undeserving politicians re-elected. Freddie borrows money at low rates...in order to lend it at higher rates. A pretty simple business, it has two risks: 1. That interest rates will move in an adverse direction...and 2. That the mortgages it holds will turn out to be worth less than it thought (when homeowners stop making payments...for example...or housing prices fall). Fannie’s executives must have to look at these risks more often than they shave. They are so much a core part of the business that the company cannot deny them; instead, it has to manage them – for which it has access to a huge army of hedgers, quants, intermediaries and speculators with very sharp pencils and very rich imaginations.

But wouldn’t you know it, just when things were going so well – with mortgage brokers lending money coast to coast like a house o’ fire – then along comes this totally unanticipated event, like a meteor striking the earth! And wham...all those sharp pencils break at once.

Seriously, this subprime housing meltdown ...who could have seen that coming?

Not the rating agencies. Last month, Fitch said it was caught off guard by “the unprecedented reversal in home prices.” What’s the matter with these people? What’s unprecedented about house prices going down? Funny how no one took these guys aside and whispered in their ear:

“Pssst...markets go up AND down. And by the way, when you lend out money recklessly...you gotta expect trouble.”

Apparently, no one said a thing. It is as if these guys had come to Wall Street on the back of a turnip truck...and signed up for work the next day.

Now, they find the work is not as easy as they had thought. This week, the cost of protecting against credit whammies rose to an 18-year high – based on two year interest rate swap prices. “More black clouds on the credit horizon,” the Financial Times reports. Countrywide is trading at less than $10 a share. And Citigroup shares have been almost cut in half.

“‘The widening of swap spreads is a function of tight lending and a de-leveraging in the financial system...’ said one bond strategist. ‘The last two times we saw these meteor-like spikes in swap spreads in the U.S., they were followed by a recession. Liquidity is absolutely horrible.’”

And so papers are all talking about the credit crisis beginning to crunch down on the middle classes. Building permits are at a 14-year low. Foreclosures are still rising. House prices are still going down. More and more economists are forecasting recession.

“The Coming Consumer Crunch,” Business Week calls it.

And this from our old friend Jim Rogers:

“This is worse than the S&L crisis. This is the first time – this is the worst credit bubble we’ve ever had in American history. No – never in American history have people been able to buy a house with no money down...never. That’s never happened anytime in the world. So, we have the worst credit bubble . It’s going to take a long time to work its way out. You don’t cure a bubble in five or six months... It takes five or six years.”

In today’s Financial Times , our old friend Grover Norquist complains about the “dynastic disease” in American politics.

“We are about to hold a presidential election,”

he writes,

“that may extend a sequence that gives the land of the free four years of George H.W. Bush, eight years of William Clinton, eight years of George W. Bush, son of, and the start of eight years of Hillary Clinton, wife of.”

Grover notes that America was set up as a country without an aristocracy. No inherited titles. No king. No purple robes.

But now there is a “creeping tendency to see elected office as a family heirloom.” Not just in the White House, but in Congress too. Grover cites dozens of examples. Some are very familiar. Certain families have national brand names that prove useful to gullible voters – Kennedys, Bushes, Gores. Most are just local brands like the Dingells of Michigan. And sometimes the desire to keep a political post in the family reaches comic levels. When Senator Mel Carnahan died just before an election, somehow his widow won the race – and she wasn’t even on the ballot.

But Grover is no medical man. He is wrong about the ‘disease.’ It’s not a disease at all. It’s merely politics in its natural, unhealthy condition. If the idea of democracy is that voters put their heads together and select the most worthy candidate, the whole thing is a fraud. Just look at Congress. What voters really do is select the fellow with the best haircut, the best line of guff, or the smoothest fundraising machinery. And it helps to have name recognition. That’s how popular actors – such as Ronald Reagan and Arnold Schwarzenegger – were able to break into the business. People do not really select the best man for the job; they have no way of knowing what the job is or who would be best for it. Instead, they buy their candidates like bath soap...based on the jingle that most appeals to them. And that’s why a hereditary monarch is actually better than an elected president. Monarchs are born to rule, rather than elected to it; that is, they are chosen by chance rather than by fraud.

Until tomorrow,

Bill Bonner
The Daily Reckoning